Two kinds of velocity of money may be distinguished: transactions velocity and income velocity.

1. Transactions Velocity:

Transactions velocity of money refers to the average number of times a unit of money changes hands to effectuate total transactions. In Fisher’s equation of exchange, MV = PT, V stands for transactions velocity. It is equal to the market value of all goods and services transacted divided by total money supply, i.e., PT/M.

2. Income Velocity:

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Income velocity of money refers to the average number of times a unit of money is used in making income transactions (i.e. in making payments for final goods and services).

With the development of social accounting and with the growing importance of national income, a tendency has developed to express Fisher’s equation of exchange in terms of real income (Y) rather than in terms of transactions (T).

The difference between the transactions version (MV = PT) and the income version (MV = Py = Y) of Fisher’s equation is that while the former includes T, that is, all goods, intermediate and final, the latter excludes the intermediate goods and includes only final goods to avoid double counting. V in the income version of Fisher’s equation is income velocity of money.

Income velocity of money is smaller than the transactions velocity of money because the former relates to the transactions of only final goods, the latter relates to the transactions of all goods, intermediate and final.